The Fed’s trial baloon

Hardly had the International Monetary Fund recommended that the US Federal Reserve delayed its interest rates hike until the next year (I made a post about it earlier), when there came an immediate response from the US central bank. The answer, as expected, was negative.

It was announced at the Economic Club of Minneapolis (June 5) meeting by the Federal Open Market Committee (FOMC) Vice Chairman and NY Fed president, William Dudley. According to him, the Federal Reserve is still on the way to raising interest rates in 2015. Thus, Dudley confirmed the recent statement made by Fed’s president Janet Yellen, that the majority of the FOMC would like to start the tightening cycle later this year.

In May, I wrote that in present circumstances, lack of strength of the US economy is the argument in favor of raising interest rates rather than in favor of postponing the event. The sooner the Fed will begin to normalize its monetary policy, the more time it will get for the implementation of this process. Therefore, there will be more opportunities to make the rate hike smooth and gradual.

William Dudley expressed a similar idea in his speech. He made it clear that the first rate hike would be kind of like a trial balloon for the Federal Reserve: the market reaction to this event will help the central bank to decide how fast it should proceed with its tightening. If the reaction is mild, it can be more aggressive. On the contrary, if the first rate hike will lead to a sharp tightening of credit conditions, the Fed will have to slow down.

If we analyze the FOMC Vice Chairman’s speech more carefully, we’ll see that his position doesn’t differ much from that of the IMF. He names the same conditions for the rate hike, as the IMF economists:

continuing recovery in the labor market;

steady inflationary expectations;

clear and positive economic outlook.

The only difference is that IMF experts expect these conditions to be met only next year, while the NY Fed president hopes for this year. Time will tell. But let me remind you, that at the end of the last year Dudley expected the Fed to increase rates in the middle of 2015. Now, he has moved his expectations to the end of the year.

Dear traders, please post your comments to our forecasts and share your own opinion. Your ideas can be very helpful for the newcomers in the forex market. Thank you!

Hardly had the International Monetary Fund recommended that the US Federal Reserve delayed its interest rates hike until the next year (I made a post about it earlier), when there came an immediate response from the US central bank. The answer, as expected, was negative.

It was announced at the Economic Club of Minneapolis (June 5) meeting by the Federal Open Market Committee (FOMC) Vice Chairman and NY Fed president, William Dudley. According to him, the Federal Reserve is still on the way to raising interest rates in 2015. Thus, Dudley confirmed the recent statement made by Fed’s president Janet Yellen, that the majority of the FOMC would like to start the tightening cycle later this year.

In May, I wrote that in present circumstances, lack of strength of the US economy is the argument in favor of raising interest rates rather than in favor of postponing the event. The sooner the Fed will begin to normalize its monetary policy, the more time it will get for the implementation of this process. Therefore, there will be more opportunities to make the rate hike smooth and gradual.

William Dudley expressed a similar idea in his speech. He made it clear that the first rate hike would be kind of like a trial balloon for the Federal Reserve: the market reaction to this event will help the central bank to decide how fast it should proceed with its tightening. If the reaction is mild, it can be more aggressive. On the contrary, if the first rate hike will lead to a sharp tightening of credit conditions, the Fed will have to slow down.

If we analyze the FOMC Vice Chairman’s speech more carefully, we’ll see that his position doesn’t differ much from that of the IMF. He names the same conditions for the rate hike, as the IMF economists:

continuing recovery in the labor market;

steady inflationary expectations;

clear and positive economic outlook.

The only difference is that IMF experts expect these conditions to be met only next year, while the NY Fed president hopes for this year. Time will tell. But let me remind you, that at the end of the last year Dudley expected the Fed to increase rates in the middle of 2015. Now, he has moved his expectations to the end of the year.

Dear traders, please post your comments to our forecasts and share your own opinion. Your ideas can be very helpful for the newcomers in the forex market. Thank you!

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